Responsible Credit Card Use

Many young people see credit cards in one of two ways: “Yay, free money!” or “No way, I’m steering clear of those!” What you may not realize is there is a middle ground in the form of responsible credit card use. To start off on the right path you need to understand why you might want to use a credit card in the first place.

Building Good Credit
Credit cards – when used responsibly – can help you establish good credit history. You can learn more about establishing credit here, but the bottom line is that it takes credit to get credit. While you may not need a loan or other credit at this time, odds are you will when it’s time to pay for college, buy a car or purchase your first home. Showing lenders you can responsibly use a credit card helps them feel more confident that you will pay back their loan as well.

Rewards
Some cards come with extra perks, such as a cash back bonus (which can be applied to your statement, received in the form of a check, or used for gift cards or merchandise). Combined with the importance of establishing credit, rewards such as these are a nice bonus. Just make sure you aren’t getting charged an annual fee from the company to get them.

Using Credit Responsibly
Now you know why it might be wise to use a credit card, but you still need to know how to do it responsibly. The biggest rule when it comes to responsible credit is do not borrow more than you can pay off each month. For example, if you use a credit card to purchase gas for your car – let’s say two fill-ups of $40 – you need to set aside $80 to pay off the bill at the end of the month. Why? Two words: interest charges. Each month you don’t pay your account balance in full, the credit card company will charge you extra money in the form of a percentage of your balance.

This is where many first-time borrowers get into trouble. Maybe you really want to attend a concert with your roommate but you can’t afford the ticket. “I’ll just put it on my card,” you think. “I’ll save extra next month and take care of it.” Sure, it’s possible you will. But this starts a slippery slope of using your credit card as a loan instead of a tool for establishing credit. The same is true if your card has cash advance capabilities. These advances often come with hefty interest rates or fees.

Can you use a credit card in an emergency? Yes. But only if it’s truly an emergency. Otherwise, you need to use credit cards as a bridge to better credit, not a slippery slope to debt.

Learn more about responsible credit card use from your credit union and this article from iGrad.